Loyalty marketing can be a crucial first step to help you pry the dreams from customers skittish about privacy, wise to targeted offers, and numb to discounts. Integrated tightly with your overall CRM strategy, a loyalty-marketing component can become a powerful engine for your CRM machine.

As the stories of failed rollouts and disappointing results continue to mount, many companies have shelved enterprisewide CRM initiatives in favor of targeted baby steps. But are they taking the right baby steps? To develop that 360-degree view of the customer that CRM pundits trumpet, you need to know not only who your customers are and what they've bought, but also what they dream about. Loyalty marketing can be a crucial first step to help you pry the dreams from customers skittish about privacy, wise to targeted offers, and numb to discounts. Integrated tightly with your overall CRM strategy, a loyalty-marketing component can become a powerful engine for your CRM machine.
There has been a recent sea change in automobile design classes around the country. According to automotive designer Ken Okuyama, the chair of the Transportation Design Department at the Art Center College of Design in Pasadena, CA, "Right now, the first thing designers do is set the dimensions, base the structure around the engine and the major components, and then squeeze people in."
What Okuyama and his colleagues are trying to push is the notion of putting the passenger first. "What we are trying to do," he says, "is change the priorities so that when you design a car, you locate the people first and put the architecture around them."
The design strategy of putting the passenger first or rather, the lack of such a strategy, serves as a useful metaphor for current customer relationship management efforts. Right now, few businesses are actually putting the customer first in their CRM rollouts. They're focusing on short-term efficiency gains and disparate tactical maneuvers, then hoping that all the pieces will fit together. But will customers get on board?
Back to the drawing board
Despite the current economic conditions, forecasts for global spending on CRM continue to skyrocket. Research firm GartnerGroup predicts that CRM spending will reach a whopping $76.3 billion in 2005.
And yet, despite the endless piles of cash wheelbarrowed to CRM software suppliers and consultants around the globe, many CRM initiatives fail. The notable lack of results from CRM rollouts has prompted some wags to declare CRM dead or if it isn't dead, it's at least a trend whose time has passed, like ERP or stonewashed jeans. The dew, as they say, is off the lily.

"Most of the time the failure starts with a lack of strategy, or a failure of vision about what you're trying to achieve," says Michael Gorsage, vice president and resident CRM guru at consulting firm A.T. Kearney Inc. "It's trying to do too much too fast."
But the business strategy of CRM is neither dead nor antiquated. It's simply a machine that has run out of gas. Here's why: According to a 2001 survey by the Conference Board, CEOs ranked customer loyalty and retention as their number one management challenge. And yet a Gartner survey of 600 large enterprises found that, although 75 percent of the companies surveyed have embarked on CRM implementations, less than 25 percent have actually organized around the customer. What's wrong with this picture?
Stung by $30 million to $120 million deployment bills and rollout times lasting from 18 to 36 months, companies have scaled back, focusing on core business units with quick-fix sales force, marketing, or customer service automation packages that provide efficiency gains and instant gratification. While this incessant corporate navel-gazing may provide a short-term panacea, it fails to address the real issue: the customer relationship. Because the ROI from these efficiency gains is subject to diminishing returns, companies soon find themselves back where they started--wondering who their customers are and why they're drifting away to the competition.
"That's what we're seeing now," says Claudio Marcus, CRM research director for GartnerGroup. "Companies that embarked on sales force and customer service automation have for the most part extracted those savings now, and are looking to leverage that infrastructure to enhance their revenues."
Organizing around the customer means just what it means to automobile designers: building the enterprise around your customers, not trying to grind them into sausage between the gears of ill-fitting CRM deployments. To build this customer-centered CRM machine, you first need an engine to collect customer data and distribute it to the far-flung corners of the enterprise. To capture said data, you need a mechanism to encourage customers to volunteer information, and to motivate them to engage in profitable behavior. No business strategy has proven more effective at these tasks than loyalty marketing. A well-conceived loyalty strategy can be an ideal first step toward a broader CRM rollout.
"Loyalty programs are absolutely a part of a customer relationship strategy," Gorsage says. "If you have a CRM program without recognizing that the whole emphasis is about retention and customer loyalty, then who are you kidding?"
With that in mind, here are a few design rules to get you started.
Rule #1: Trade Information For Value
All CRM solutions begin with collecting data. But in an era of suspicious shoppers and looming privacy legislation, how do you get your customers to raise their hands and identify themselves?
Twenty years of loyalty marketing efforts have proven that customers are willing to trade information for value. Most CRM consultants prefer to deliver value through personalization and discounts. But frequent discounts erode ROI and damage the integrity of your customer relationships by building loyalty to the deal, rather than to the brand.
The rewards offered by well-conceived loyalty programs, however, represent compelling, indisputable added value. By acting as deferred, accumulated discounts, loyalty point structures preserve margin and shift the customer's attention away from price and back to where it belongs: the relationship.
"It's a very valuable piece," Marcus says. "Because they belong to a program, you can start to get a more complete view of customers. They want their transactions associated with that program so they can tap into those hard and soft benefits."
Finally, the most underestimated benefit to trading information for value is that, given a compelling, relevant offer, the customers will do the work. A good loyalty program with tangible rewards will have your customers clamoring for more opportunities to identify themselves.
Rule #2: Use Membership as an Identifier
Airlines have understood for years what retailers have only recently begun to grasp: if a customer isn't a member of your private label card, co-branded credit card, or coalition program, you have no idea who she is. She may love your customer service, your store layout, or your location, but how would you know? You've never given her a reason to speak up.
Data miners stress the importance of having a key identifier by which customers can be tracked across channels and touch points. Without a frequent flyer number attached to your account, airlines have no way to know that you were bumped in Albuquerque, spent four hours in a delay at O'Hare or that they lost your luggage in Cincinnati. The only way to get on their radar screens is to start earning miles.
Likewise, by using loyalty program membership as an identifier, building a multichannel profile of a customer becomes easier. Brand your program across all channels--including point-of-sale, on your Web site and in your catalog--and you can then funnel valuable customer information throughout the enterprise. Every transaction becomes more fuel to help warm the customer relationship.
Rule #3: Rally Around your Most Valuable Customers
Companies that enact CRM strategies only to provide the same level of service to every customer are forgetting the cardinal rule of relationship marketing: All customers are not created equal. Organizing the enterprise around your customers isn't enough. You need to organize around your most profitable customers.
Retailers understand that a small percentage of their customers are responsible for the lion's share of their profits. By focusing your CRM deployment on high-value customers, it's easier to justify the cost, and easier to predict the ROI when you roll out other CRM initiatives. Just remember to focus on resource reallocation, rather than on incremental costs, in order to avoid duplication of effort.
Let's say you're ready to roll out a customer service automation package. You've identified the most valuable customers in your database based on share of wallet, average transaction size, frequency of visit, or whatever other metrics you value. Thus armed, you can implement differentiated service initiatives based on customer value, rolling out the red carpet for your most profitable segments with separate URLs, dedicated toll-free numbers and priority service. Your CRM efforts then serve as additional soft benefits which, handled adroitly, can inspire customers to become more valuable in order to achieve elite status.
If this strategy sounds familiar, that's because it is. Once again, the travel industry has led the way. After all, what are tiered loyalty program levels--the Platinum, Gold, and Silver levels by which airlines and hotels differentiate service, but a basic form of CRM?
Rule #4: Use Analytics to Increase the Yield
As CRM efforts become increasingly dependent on the bottom line, smart companies will focus on the science of analytics: data collection, mining, and analysis. New software packages will increase the speed and accuracy with which data is processed. "Black Box" solutions will do much of the work for you. But the critical differentiator between the winners and the also-rans will be in how the data is used to increase the value of customer relationships. The goal of your CRM strategy must be to create and sustain incremental, profitable customer behavior.
Once again, your loyalty program can provide both the engine and the fuel to drive these efforts. Experimenting with your rewards rules engine by testing offers, tweaking them, and analyzing responses can teach you how to motivate customers with short-term promotions. Meanwhile, the typically fat 20 to 50 percent member response rates to surveys can create powerful inroads into gathering elusive but all-important psychographic data.
You can then use this data to increase the yield from your best customers with product volume increases, up-sales ordering, version reordering, cross-selling, new product sales, and referrals. Increases in incremental revenue--revenue you wouldn't have without the help of your loyalty program--will tell you that you're on the right track.
Rule #5: Keep it Simple
How cool would it be if you could separate your customers into two camps: good customers and bad ones? And then cater to the good ones while you let the bad ones twist in the wind? But customers come in more than two flavors. It's tempting to break down customers into micro-segments and design complex rules structures to ensure that each segment is recognized and rewarded appropriately.
But what about the poor kid who works at the checkout counter? He has to face members of these micro-segments on a daily basis. The real trick is to design clear, unambiguous rules that can be understood and practiced by the least-trained customer service rep in the company. To make this happen, you need top-down management support backed by a crackerjack IT team to help put the rules in place. If the hard and soft benefits in your loyalty program are relevant and tiered to customer value, then you've come a long way.
The stylish, affordable, functional CRM machine
As we talk about the importance of a loyalty-marketing component to CRM strategy, be aware that there's a flip side: it's equally essential to integrate your loyalty program with other CRM components. You must connect the engine to the chassis.
"In order to leverage information from your loyalty program, you need a tighter integration with your overall CRM efforts," Marcus says. "Most loyalty programs have been standalone. But the real value lies in tying that information to all the other information you have about customers from a variety of CRM operational systems. You need to discern valuable impact and leverage it back. You need to demonstrate a deep understanding of the customer no matter how they interact with you."
Companies that follow this strategy will find themselves with a dramatic edge. Just as Ken Okuyama places his passenger first and then builds the automobile around that passenger's needs, so too must CRM planners place their most valuable customers at the center of the enterprise.
"It's a very interesting application of a similar philosophy to different circumstances," says Okuyama of our analogy. So take a few baby steps. Identify profitable customers, trade value for information and align your strategy across channels according to their needs and desires. With a loyalty component as your engine and customer data as your fuel, you'll soon find yourself behind the wheel of a high-performance enterprise.
"Customer-oriented programs are going to continue to add value and have demonstrable ROI," Gorsage says. "If you create a loyalty program for your customers, then you're giving something back. You're investing in that relationship with them for mutual benefit. It's a two-way street."
About the Author
Rick Ferguson is managing editor of Frequency Marketing Inc.'s Colloquy